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Australian Economy – fairytale? AUD set to soar higher on back of dodgy data?

Watching USD -v- AUD – and the USD definitely has a few problems – okay more than a few – and whilst the U.S. has a government – as dysfunctional as it now is – their inability to implement economic changes – will allow the USD to drift lower and investors would prefer Euro – stocks and/or real estate – to attempt to offset losses.

Nothing will change until demand increases – and as I have mentioned in a prior article I anticipate this mid to late March 2018.

In the meantime – a renewed currency war?

Japan does not like the Yen strengthening and are looking to discount its value in relation to the USD – so watch that space.

Maybe action will be taken – and maybe not – but that depends on whether the Euro maintains strength and Draghi pulls his head in and allows that strength to continue – but this will be to the detriment of Germany.

Remember that ‘might is right’ and as a strengthening Euro will have ramifications for the German manufacturing and export markets – it will be interesting to see how they respond.

Yes folks – as the USD slowly self destructs – with the wishes of Trump – as he favors both low interest rates and a low U.S. dollar – then we have a problem throughout the world.

There has to be that offset – a natural balancing amongst all currencies – to the depreciating USD value – and that is simple basic accounting.

In looking at all data I was particularly interested in the Australian economic statistics – and no not the OECD Australian forecasts – which I highlighted in a prior post – that is real fairytale stuff.

This is that chart – a tad too optimistic?

The real story is in the Australian Bureau of Statistics data – but in previewing these figures I was taken aback by inclination of this government agency to gloss over problems – to ‘guild the lily’.

A classical example is shown here:-

Over the past ten years all State Governments have been selling off the State Infrastructure Utilities to balance the books – disposing of taxpayer funded assets to meet operating costs.

Note that the majority of these utilities are now private and/or private companies or offshore sovereign funds – their presence has seen a horizontal growth covering acquisitions to cover supply of electricity – gas – solar.

That impact is felt in the current GDP figures – which technical makes a mockery of the situation – as these asset purchases are recorded for GDP purposes but the corresponding sale is not.

The impact on the GDP – huge.

In other words – if one deducts the largest increase to the Utilities contributions for the quarter a – far greater GDP deficit would have been recorded.

Investors rely on this data – and they do not drill down to the nitty gritty – as it would be obvious that whilst the expense in acquisition is recorded – subsequent profits will no longer remain in Australia – and should costs increase in either Interest or wages the net effect will be increased consumer costs for essentials.

So how does one reconcile the sale of these Utilities – which has increased direct costs to the consumer?

Then the cost of rent – dictated by the value of Australian real estate – which is – in my opinion – in a bubble with the medium prices of real estate in Sydney and Melbourne – the two highly populated cities – currently being around $1.5million.

Any real estate investor would be demanding a reasonable rate of return on these investments to cover – annual costs and an investment interest return – which is compounded by increase local council rates and taxes.

Yes local councils have to increase wages for labour in line with the minimum wage set.

This therefore has consequences – and who bears the brunt of these increases?

Technically it does not matter – whichever body – owner or renter – has to bear the cost and increased payments required from ones ‘net disposable income’ – so the never ending upward spiral of diminishing returns from labour diminishes.

Simple – ignore it – as does the ABS – and continue with the incorrect indicator – net disposable income per capita – that has a direct correlation to the inflation rate.

Yes the minimum wage is adjusted for the inflation rate – which therefore can only increase year on year.

So be it – GDP distortions through sale of utilities and the continuing happy happy feeling of knowing that ‘Enhanced Living Conditions Have Increased’ over the last ten years – no disclaimer – as to the crazy methology of tying an ever increasing minimum wage – ignoring the higher hidden costs associated with the consumer basic requirements of rent and utilities.

But there is more – exports of raw materials have increased.

Therefore – whilst the country has an unsustainable debt load – both governments and individuals – then income foregone from utilities plus an ever increasing rent cost – the fairytale on the Australian economy continues – to the detriment of manufacturing – which will suffer as cost competition from cheaper imports rise.

Will investors consider these points when they invest into AUD?

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Nope – they don’t care – as Australia is seen as a ‘safe haven’ for currencies – and away from foreign country conflicts – most reliable of all raw material exporting countries – together with Canada – to maintain stability.

The interesting point though – is should a currency war erupt – then how low is the Reserve Bank of Australia prepared to cut interest rates?

The country can ill afford to stand back and accept the deflationary pressures associated with either Japan or China depreciating their currencies.